Why else is cash important to my portfolio as an individual investor?

According to experts at The Wall Street Journal, cash plays a very important role for all of our portfolios at different stages in our financial lives. First and foremost, by preserving capital and insulating it from the downward trend of a market, you have more money available to invest later. There is also a big opportunity cost that must be considered when you think of selling off investments—instead of using cash—in order to acquire new investments. By selling prematurely, you may not realize the gains you wished to make, and may actually incur losses. Many experts believe that if you need cash to make big-ticket purchases such as cars or houses, it is better to hold this money in the form of cash than to invest the money and have to sell the investment after poor performance, or at a loss, after a relatively short period of time. One expert cited the fact that many central banks have priced cash at levels approaching zero (percent interest), creating volatility in the prices of other investment vehicles. So it is best to have a strategy for the proper allocation of cash within your portfolio.

MANAGING DEBT

How can I get out of debt?

The most important step to getting out of debt is to understand what behaviors or circumstances caused the debt to begin with, and then focus first on changing those behaviors. This means that if you have incurred a lot of credit card debt because of undisciplined spending habits, you must immediately attack the root cause of the debt in order to reduce it. If you incurred a debt because you obtained a mortgage for more house than you can afford, you must find a way to sell the house without incurring a loss, and purchase a smaller, more affordable house.

What is the second most important step to getting out of debt?

The second step is to save this money you used to pay off loans and credit cards, and to pay special attention not to take on any more debt going forward. In other words, take the money you used to pay for your monthly credit card bill or car loan, and put it directly into a savings account, spending nothing on your credit card going forward. And remember to pay yourself first.

Is there any priority I should consider when paying down debt?

Yes. You should first pay off your highest interest loans or credit obligations. Credit cards are usually a high-interest rate credit obligation. So you must pay as much of your credit card balance, plus the interest on the balance, each month until the balance reaches zero. If you plan it out, and pay a certain amount each month, without taking on any new debt, you will see a light at the end of the tunnel. Pay a consistent amount each month, as much as you can afford. If you feel you can pay off more, because of a wage hike or pay increase at work, use that extra cash to reduce your debt.

 
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